India’s rupee fell for the second day on concern capital outflows will rise as the U.S. prepares to pare stimulus, increasing the currency’s vulnerability to the current-account deficit and a weak external debt position.
Global funds pulled a net $2.3 billion from Indian stocks and bonds last month, exchange data show, before the Federal Open Market Committee meets Sept. 17-18 to decide on when to taper its monthly bond purchases. India’s gross domestic product grew in the second quarter at the slowest pace since 2009, which could worsen the highest external-debt-to-GDP ratio in 12 years and push policy makers to try and bolster foreign-exchange reserves that dropped to the lowest since 2010.
“The weak external position puts the currency under pressure and therefore limits policy makers’ ability to boost growth,” said Sonal Varma, an economist at Nomura Holdings Inc. in Mumbai. “Financing the current account is the single biggest concern for India right now.”
The rupee weakened 1.2 percent to 66.8275 per dollar as of 10:23 a.m. in Mumbai, according to prices from local banks compiled by Bloomberg. It plunged 8.1 percent last month, the biggest drop since March 1992 and the steepest decline among 78 global currencies tracked by Bloomberg. It touched an unprecedented 68.845 on Aug. 28.
India’s current-account deficit widened to a record 4.8 percent of GDP in the year ended March 31. The government’s target of limiting the shortfall to 3.7 percent this year would be higher than the 2.5 percent the central bank considers sustainable.
The nation’s economic growth slowed to 4.4 percent last quarter from a year earlier, compared with the 4.7 percent median estimate in a Bloomberg survey, official data showed last week. One-month implied volatility in the rupee, a measure of expected moves in the exchange rate used to price options, fell five basis points today to 21.21 percent, still the highest among 24 emerging markets tracked by Bloomberg.
Raghuram Rajan, who is credited with predicting the 2008 financial crisis, takes charge as governor of the Reserve Bank of India on Sept. 5 as Duvvuri Subbarao’s term ends. A weak rupee boosts price pressures as India imports about 80 percent of its oil.
“Monetary policy is hamstrung by currency volatility and concomitant risks to inflation and external imbalances,” Radhika Rao, an economist at DBS Bank Ltd. in Singapore, wrote in a research note today. “India lacks catalysts to reinvigorate growth, save for fiscal support.”
Three-month onshore rupee forwards fell 1.2 percent to 68.38 per dollar, data compiled by Bloomberg show, Offshore non-deliverable contracts declined 0.9 percent to 68.85. Forwards are agreements to buy or sell assets at a set price and date. Non-deliverable contracts are settled in dollars.
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